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IDFC: Competing on spreads - Views on News from Equitymaster

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IDFC: Competing on spreads

Oct 23, 2009

Performance summary
  • Consolidated income from operations grows 9% YoY in 1HFY10, on the back of 3% YoY growth in advances. Disbursements grow by 5% YoY, approvals by 34% YoY in 1HFY10.
  • Asset management fees increase 1.8 times, total asset under management (AUM) stands at Rs 342 bn at the end of September 2009.
  • Net interest margins (NIM) improve from 3.2% in 1HFY09 to 3.5% in 1HFY10 due to lower funding costs.
  • Non-interest income doubles in 1HFY10 due to higher investment banking and loan related fees.
  • Bottomline grows by 25% YoY in both 2QFY10 and 1HFY10 despite higher provisioning.

Consolidated numbers…
Rs (m) 2QFY08 2QFY09 Change 1HFY09 1HFY10 Change
Income from operations 18,083 20,121 11.3% 9,397 10,198 8.5%
Interest expended 10,086 10,388 3.0% 5,219 5,121 -1.9%
Net Interest Income 7,997 9,733 21.7% 4,178 5,077 21.5%
Net interest margin       3.2% 3.5%  
Other Income 87 168 93.1% 68 145 113.2%
Operating expense 1,938 2,102 8.5% 1,019 1,241 21.8%
Provisions and contingencies 107 194 81.3% 58 98 69.0%
Profit before tax 6,039 7,605 25.9% 3,169 3,883 22.5%
Tax 1,518 1,952 28.6% 833 975 17.0%
Effective tax rate 25.1% 25.7%   26.3% 25.1%  
Profit after tax/ (loss) 4,521 5,653 25.0% 2,336 2,908 24.5%
Net profit margin (%) 25.0% 28.1%   24.9% 28.5%  
No. of shares (m)       1,295 1,295  
Book value per share (Rs)*         52.1  
P/BV (x)         3.1  
* Book value as on 30th September 2009

What has driven performance in 2QFY10?
  • With a reasonable pick-up in demand for funding for infrastructure investment activity in the past six months, IDFC saw its sanctions grow by 34% YoY. However, the growth in disbursements and loan book remained tepid at 5% and 3% YoY respectively. The institution had a historically low disbursement to sanction ratio of 50% in 1HFY10. IDFC has clearly prioritised its goals into – liquidity, profitability and growth. This has resulted in the institution cutting back on its incremental disbursement despite sufficient capital adequacy (24% in 1HFY10). While the loan growth is well within our estimates for FY10, IDFC will be targeting loan growth in the range of 15% to 20% in the medium term.

  • Ability to borrow at cheaper rates has helped IDFC improve its NIMs to 3.5% (3.2% in 1HFY09). We had estimated the same at 3.0% for the full year.

    Cautious growth…
    (Rs m) 1HFY09 1HFY10 Change
    Sanctions 74,110 99,030 33.6%
    Disbursements 46,770 49,070 4.9%
    D/S ratio 63.1% 49.6%  
    Advances 213,930 220,450 3.0%

  • An interesting revelation by IDFC’s management in the conference call today was that with banks now having to spend more to penetrate into Tier III and IV cities, their systemic cost of funds and asset pricing is set to rise. Particularly so until the growth in advances pick up reasonably. This will ease the competitive pressure on IDFC’s asset book and also ease the pressure on its spreads.

  • The share of non-interest income to IDFC’s total income increased from 16% in 1HFY09 to 27% in 1HFY10 due to higher treasury and investment banking income. The institution also clarified that in case of loans disbursed against shares of companies, a loan to value ratio of 2 times is maintained. The volatility in share prices have therefore not impacted IDFC’s asset book.

  • Asset management fees doubled over the past 12 months and comprised 27% of IDFC’s total income in 1HFY10 (18% in 1HFY09). The same has grown with incremental revenues from private equity and asset management business (IDFC AMC). Investment banking and broking income grew by 36% YoY, loan related fees grew by 5% YoY in 1HFY10. The AMC related fees will, however, remain susceptible to the new SEBI regulations.

    Funds under management
      1HFY09 1HFY10 Change
    Funds US$ m Rs m US$ m Rs m  
    IDFC Private Equity 1,300 61,180 1,248 59,920 -2.1%
    Fund I 180 8,440 176 8,440 0.0%
    Fund II 420 19,880 414 19,880 0.0%
    Fund III 700 32,860 658 31,600 -3.8%
    IDFC Project Equity 870 35,890 799 38,370 6.9%
    IDFC AMC 2,260 1,060 5,080 243,850 22904.7%
    IDFC Investment Advisory 20 106,460 - -  
    Total 4,450 204,590 7,128 342,140 67.2%

  • The institution is currently adequately capitalised with CAR of 24% in 1HFY10 and needs to maintain minimum CAR of 15% by March 2011 as per the RBI norms. The operating costs for the institution have also increased by 22% YoY (cost to income ratio of 24%) with the additional employee intake. IDFC had 0.2% net NPA levels at the end of 1HFY10.

What to expect?
At the current price of Rs 161, the stock is attractively valued at 2.5 times our estimated FY12 adjusted book value. With one of the highest capital adequacy ratios, highest operating efficiency and one of the best return ratios; we reiterate our positive view on the company with a long-term perspective. Having said that, we see lower asset growth restricting the balance sheet growth for the institution in the medium term.

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